Outsourcing may be defined as a process of entering into a contract with an organization or a person to do a particular function, which typically can otherwise be done in-house. In outsourcing, an organization or a person who offers their services is referred to as a vendor and an organization or a person who takes services of the vendor is referred to as a client. When the client outsources some work to the vendor, they sign an agreement, which includes parameters, such as price for performing the outsourced process, quality of work, and duration of work. Such type of agreement is generally referred to as an outsourcing engagement. In one scenario, to meet the expectation of both, the client and the vendor, the price of performing the outsourced process should be such that both the parties benefit from the outsourcing engagement.
In outsourcing industry, various types of pricing models are used to determine the price of the outsourced process, such as an input based pricing model and a transaction based pricing model. In the input based pricing model, the client pays for time and material of the vendor resources. For example, if ten people work together to perform the outsourced process, then the client would pay for the ten people only and not for the amount of work done. Whereas, in the transaction based pricing model, the client pays to the vendor for transactions or per unit of work performed. For example, if in the outsourcing engagement, it has been decided that resolving a query would cost hundred rupees to the client, then the client will pay depending upon the number of query resolved, irrespective of the resources employed by the vendor. That is why many clients prefer the transaction based pricing over the input based pricing in situations where they are able to create transactions and processes. But at the same time, the transaction based pricing pose a complex question of deciding or estimating the apt price for the amount of work outsourced, for the vendor and the client. Therefore, estimating effort required for performing the outsourced process and pricing the outsourced process have become one of the important activities in the outsourcing industry.